RBS expected to shrink investment arm after Libor revelations

Ever since Barclays was fined £290 million in June for rigging the benchmark interest rate, RBS chief executive Stephen Hester has been preparing the bank for the possibility of a worse humiliation by regulators on both sides of the Atlantic.

Bob Diamond, Hester's counterpart at Barclays, had to quit within days of the announcement of the Libor fine in June but the RBS chief executive would be hoping for support from regulators even though the fixing of Libor appears to have carried on for two years following his taking up office in October 2008.

But top managers at the RBS investment bank, including its chief executive John Hourican, who it has since emerged was planning to leave following reshaping the business, may shirk responsibility for the disregard shown for the market even though they were not personally culpable.

The head of global trading, Peter Rading, whose controversial redevelopment of his London home came to light last week, resigned on Friday for personal reasons and although the timing could prove helpful for RBS, there was no suggestion of his involvement.

However, in the evidence they would publish, the Financial Services Authority (FSA) and US regulators would announce the fine without naming individuals; it would reveal how traders fixed an interest rate used to determine borrowing costs of $300 trillion (£189tn) of financial contracts – ranging from mortgages to loans for big companies.

Meanwhile, Hester has warned of a "miserable day" for RBS when the punishments are meted out, with the bank braced for the publication of embarrassing emails revelatory of the extent of collusion between traders.

The revelations would bring RBS's investment bank under fresh scrutiny and possibly re-ignite calls from political factions who want the 81-per cent state-owned lender to focus on its domestic market.

Switzerland's UBS, slapped a record $1.5 billion last month for its role in the rate-rigging scandal, is preparing to exit its fixed-income business and returning to its private banking roots.

According to Reuters, which quoted a political source with knowledge of government, if the findings by US and British regulators were particularly shocking, RBS would come under immediate pressure to make further cuts to its investment banking operations.

Reuters further quoted the source as saying that if the culture was rancid, the only way he could think of was to change the business to make it a lot smaller.

Sources close to RBS are confident that Hester would survive, unlike Bob Diamond, who had to quit after the lender was fined.